The petitioner, who sold advertising for a book publisher, reported no
self-employment tax for the year 1979. Under terms of a contract with the
publisher, which could only be modified by written agreement of the
parties, he sold advertising for publications in an area assigned to him
by the publisher. The salesman was responsible for and paid all expenses
he incurred to secure business for the publisher. Payment to him by the
publisher was on a commission basis each month. The contract specified he
was an independent contractor and not an employee of the publisher. The
contract was binding on the publisher and the salesman and their personal
representatives and successors in interest. The publisher did not withhold
income or Social Security taxes from commissions paid to the salesman.
Generally, the publisher did not exercise control over when the salesman
worked and he was not prohibited from selling for other companies.
Held, whether an employer-employee relationship exists is a factual
question dependent on consideration of relevant work factors, with the
burden of proof on the petitioner where he has been found not to be an
employee. Further held, that since very little control was
exercised by the publisher over petitioner's work and no control over
details of the work, that petitioner paid all his own expenses and profit
and loss depended on commissions earned, that petitioner operated under a
contract which stated he was an independent contractor, petitioner was not
an employee of the publisher but an independent contractor subject to
self-employment tax.

SCOTT, Judge:

Respondent determined a deficiency in petitioner's income tax
(self-employment tax) for the calendar year 1979 in the amount of $713.
The issue for decision is whether petitioner is an independent contractor
liable for the self-employment tax imposed by section
1401.[1]

Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Petitioner, who resided in Bowling Green, Kentucky, at the time of filing
his petition in this case, filed a joint Federal income tax return with
his wife for the calendar year 1979 with the Director, Internal Revenue
Service Center, Memphis, Tennessee.

During the year here in issue and for some years prior thereto,
petitioner was a salesman for Towndan Enterprises, Inc., which is
headquartered in La Porte, Indiana. Towndan Enterprises, Inc., during the
year here in issue and at least since 1975 has published and printed
several publications. One of the publications is entitled "Homes of
Distinction" and another the "Farm Record Book" or "Farm Recorder".

In 1975, petitioner entered into a contract with Towndan Enterprises,
Inc., under which he agreed to represent the publisher in sales of
advertising in its publications in areas which might from time to time be
assigned to him by the publisher. The contract provided that the salesman
was solely responsible for and shall pay any expenses incurred to secure
business for the publisher, and the publisher shall not pay any of the
expenses of the salesman. It further provided that the salesman was
entitled to any account signed and worked by him as his exclusive account
under the terms specified in the contract. The contract provided for
payment to the salesman on a specified commission basis, such commissions
to be due the salesman monthly, based on actual cash received by the
publisher from the customers secured by the salesman. It provided for the
length of time during which the publisher was required to continue payment
to the salesman on previously obtained business if the salesman should
cease representing the publisher.

Paragraph six of the contract specifically stated: "It is understood that
Salesman is an independent contractor and not an employee of Publisher for
all purposes." The agreement further provided that it was binding on both
the publisher and the salesman and their personal representatives and
successors in interest and was not subject to oral modifications but could
be modified only by written agreement signed by both parties. There was no
statement of any termination date in the contract.

During 1979, petitioner secured sponsors and sold advertising primarily
for the Farm Record Book or Farm Recorder, published by Towndan
Enterprises, Inc. A Farm Record Book is sponsored by a single
organization, generally a production credit association. A salesman who
earns commissions from the sale of advertising in a book for which he has
secured the sponsor is entitled to an override commission as well as his
advertising commission. Towndan Enterprises, Inc., obtains its income from
the advertising sales, and the sponsor receives copies of the publication
to distribute free, generally for public relation reasons.

Towndan Enterprises, Inc., treated petitioner and all other salesmen
operating in the same manner as petitioner as independent contractors. In
doing this, it followed the practice established in the 1950's by a
predecessor company. This practice was consistent with the practice
generally followed in the industry printing similar publications. Towndan
Enterprises, Inc., did not withhold income or social security taxes or any
other form of taxes from the commissions paid to petitioner in the year
1979 or prior years. Towndan Enterprises, Inc., issued petitioner a Form
1099 designating his payments from the company as "nonemployee
compensation."

No officer or employee of the publisher directed the days on which
petitioner worked or the location in which he worked as long as that
location was in his assigned territory or, if outside that territory, not
within the assigned territory of another salesman. The salesman bought his
own gasoline and paid his own traveling expenses, including meals and
lodging if necessary. Petitioner, on his Federal income tax return for the
year 1979, deducted $5,899.19 as the cost of meals and lodging expenses
and $6,022 as car expenses. Other than an extended absence from work by a
salesman during the period from some time in February to approximately
mid-October, which was the busy season for Towndan Enterprises, Inc., no
representative of the company exercised any control over when the salesman
worked or did not work. A salesman was not prohibited from selling for
other companies and could sell outside of his own territory except where
the territory was the stated territory of another salesman of Towndan
Enterprises, Inc. In fact, petitioner at various times sold for companies
other than Towndan Enterprises, Inc.

On his joint Federal income tax return with his wife for the calendar
year 1979, petitioner reported no self-employment tax. Respondent in his
notice of deficiency computed self-employment tax on petitioner's
self-employment income of $713, with the explanation that petitioner had
net earnings of $400 or more from self-employment which were subject to
self-employment tax.

Opinion

Section 1401 provides a tax in addition to other taxes to be imposed on a
taxpayer's net earnings from self-employment. Section 1402(a) generally
defines net earnings from self-employment to mean the gross income derived
by an individual from any trade or business carried on by such individual,
less the deductions allowed for computing self-employment net earnings
which are attributable to such trade or business. Section 1402(c) provides
that the term "trade or business," when used with reference to
self-employment income or net earnings from self-employment, shall have
the same meaning as when used in section 162 (relating to a trade or
business expense), except that such term shall not include the performance
of service by an individual as an employee. Section 1402(d) provides that
the term "employee" shall have the same meaning as when used in chapter 21
(section 3101 and following relating to the Federal Insurance
Contributions Act). Section 3121(d) defines an employee as any individual
who under the usual common law rules applicable in determining the
employer-employee relationship has the status of an employee.

Section 31.3121(d)-1(c)(2), Employment Tax Regs., defines the common law
employer-employee relationship as the relationship which generally exists
when the person for whom services are performed has the right to control
and direct the individual who performs the services, not only as to the
result to be accomplished by the work but also as to the details and means
by which the result is accomplished. The regulation goes on to state that
this means that an employee is subject to the will and control of the
employer, not only as to what shall be done but how it shall be done.

As we pointed out in Ellison v. Commissioner [Dec. 30,394], 55
T.C. 142, 152-153 (1970), whether the employer-employee relationship
exists in a given situation is a question of fact, and that the burden is
on petitioner to prove the existence of the employer-employee relationship
between himself and the company from which he receives payments where
respondent has determined that he is not an employee. As we further
pointed out, an employee relationship exists when the employer retains the
right to direct the manner in which the work is done and to control the
methods used in doing the work, as well as the details and means by which
the desired result is accomplished. See Ellison v. Commissioner,
supra at 153, and cases there cited. In Simpson v. Commissioner
[Dec. 33,402], 64 T.C. 974, 984-985 (1975), we stated that among the
relevant factors to be considered in determining whether an
employer-employee relationship exists are (1) the degree of control
exercised by the principal over the work done; (2) which party invests in
the facilities used in the work; (3) opportunity of the individual for
profit or loss; (4) whether or not the principal had the right to
discharge the individual; (5) whether the work is part of the principal's
regular business; (6) the permanency of the relationship; and (7) the
relationship the parties believe they are creating.

In our view, considering the factors listed in the Simpson case
and the nature of petitioner's relationship with Towndan Enterprises,
Inc., it is clear that petitioner was not an employee of Towndan
Enterprises, Inc., but rather was an independent contractor. The record
shows that very little control was exercised by Towndan Enterprises, Inc.,
over petitioner's work and no control over the details of that work, that
petitioner paid all his own expenses, and profit or loss depended on the
commissions he earned. The record is not clear as to the rights of Towndan
Enterprises, Inc., to discharge petitioner, but is clear that petitioner
operated under a contract and that contract could not be modified except
by agreement of the parties, though obviously, had petitioner breached the
contract, Towndan Enterprises, Inc., would have had the normal rights
incident to such a breach. Certainly, the parties here agreed by contract
that the relationship was that of independent contractor, and there was a
relevant permanency to the relationship.

Although Towndan Enterprises, Inc., received its income from advertising
pictured by salesmen, its major business was the publishing of the books
in which the advertising was contained. As we pointed out in Simpson v.
Commissioner, supra at 985, no one factor is controlling but the
result is to be determined from the entire situation present in each case.
On the facts here present, we conclude that petitioner was not an employee
of Towndan Enterprises, Inc., but was an independent contractor subject to
tax under section 1401.[2]

* * * * *

Decision will be entered for the respondent.

[1] Unless otherwise noted, all
section references are to the Internal Revenue Code of 1954, as amended
and in effect during the year here in issue.

[2] Since we have disposed of
the issue in this case on the basis of the facts of record, we do not
consider respondent's argument that Towndan Enterprises, Inc., was
entitled under section 530, Revenue Act of 1978, Pub. L. 95-600, 92 Stat.
2763, 2885, 1978-3 C.B. 1, 119, to treat petitioner as an independent
contractor and that it follows that petitioner must be treated as an
independent contractor for the purposes of the self-employment tax imposed
by section 1401.

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